How Do Business Taxes Here Compare to Other States?

November 17, 2015

How_Do_Massachusetts_Business_Taxes_Compare_to_Other_States

A wide variety of factors influence the decisions businesses
make about
whether to expand and where to locate their new or expanding
operations. These factors include the quality of a state's
infrastructure; the skills of its workforce; the proximity to materials
and customers; and the overall quality of life available to
employees.1
A particular state's tax policy - including tax
rates, rules for calculating taxable income, and the availability of
tax breaks - also plays a role, though not a primary one.2
This is not surprising given that state and local taxes account for as
little as two percent of total business costs for the average
corporation operating in the U.S.3

If, however, one wishes to examine relative levels of business
taxation
among the 50 states, in general it makes most sense to look at the
entire tax system in each state, including all state and local taxes
paid by businesses. Some states collect more revenue from businesses
using property taxes (typically a local tax), while other states rely
more heavily on corporate income taxes, gross receipts and excise
taxes, or general sales taxes (typically state-level taxes). A
meaningful, "apples-to-apples" comparison of total business tax levels
in
different states therefore must account for all of the various ways
that state and local governments collect taxes from businesses.

An update of one prominent study - produced regularly by the
Council on
State Taxation (COST) - ranks Massachusetts 39th for its combined state
and local business tax level in Fiscal Year 2013, placing Massachusetts
in the bottom quarter of all states in terms of overall business tax
levels.

The updated study was conducted by Ernst & Young for
the
Council on State Taxation,
a Washington, D.C.-based
trade association that represents over 600 multistate and multinational
corporations. The study determined that, in FY 2014, business taxes
accounted for a larger percentage of private-sector Gross State Product
(GSP) in 36 other states than they did in Massachusetts.4 Had
business
taxes in Massachusetts (at 4.1 percent of GSP) equaled the percentage
of private-sector Gross State Product as the U.S. average (4.6 percent
of
GSP), businesses would have contributed an additional $2.0 billion in
Massachusetts state and local revenues in FY 2014, using Ernst and
Young’s methodology.5 Another
interesting statistic presented in the COST report is the share of
total state and local taxes paid by businesses. Ernst & Young
calculates that Massachusetts businesses together pay 39.1 percent of
all state and local taxes collected in the Commonwealth--there are only
five other states in which businesses pay a smaller share of the total.6

A separate analysis, performed by the Anderson Economic
Group, uses a
slightly different methodology, ranking states based on the amount of
state and local business taxes paid as a share of pre-tax gross
operating surplus, which is a measure of business profitability tracked
and published by the U.S. Bureau of Economic Analysis.7 Using
this approach, the Anderson analysis finds that, including all state
and local taxes, Massachusetts businesses in 2013 collectively paid an
amount equal to 9.0 percent of their pre-tax profits. By contrast, the
lowest tax states collected from 5 to 7 percent of pre-tax profits,
while the highest tax states generally collected between 13 and 14
percent.8
Accordingly, Massachusetts ranks 25th from the top
among the states by this measure and is just below the U.S. average of
9.1 percent. Had Massachusetts businesses paid taxes at the U.S.
average,
by this measure they would have contributed another 0.1 percentage
points of their pre-tax profits, some $160 million in
2013.9

Though the overall level of business taxation in Massachusetts
is lower
than the level in most other states, Massachusetts receives a larger
share of the tax revenue it does collect from businesses through a
combination of corporate income taxes and income taxes paid by
individual filers on income received from "pass-through" businesses in
which these individuals are shareholders.10 Offsetting the higher
tax levels on these various forms of corporate profits, businesses in
Massachusetts pay substantially less as a
percentage of GSP in sales taxes, excise and gross receipts taxes, and
licensing fees than do businesses in many other states (see table,
below).

5The
U.S. Bureau of Economic Analysis measures Massachusetts's
private-sector GSP at $391.8 billion in Calendar Year 2013 and $409.0
billion in
2014. Averaging these two figures to arrive at an estimate of Fiscal
Year 2014 private-sector GSP in Massachusetts produces a figure of
$400.4 billion. Business taxes as a share of GSP were 0.5 percentage
points higher for the U.S. as a whole than for Massachusetts in FY
2014,
according to the Ernst & Young study. Converting this
percentage point
gap into a dollar figure produces an estimate of approximately $2.0
billion in reduced business taxes in Massachusetts relative to the U.S.
average in FY 2014 ($400.4 billion x 0.005 = $2.0
billion).

8Alaska,
the highest tax state by this measure, collected
19.8 percent of pre-tax corporate profits in FY 2013. This is due to an
especially heavy reliance on severance taxes, though several other
states also rely heavily on severance taxes as well, including North
Dakota, Wyoming and West Virginia. Because of this unusual tax
structure, the tax levels in these states do not provide a good
comparison to tax levels in other states.

10Some
businesses are structured such that the business profits (and losses)
are "passed through" directly to the shareholders, who then pay
individual income taxes on this income. In such cases, the corporation
itself avoids paying most or all of the corporate income tax it
otherwise would owe on this business income. Unlike in past years, the
FY 2014 COST study does not break out these two tax types into separate
categories, instead grouping them together into a single tax category.

Massachusetts Budget and Policy Center

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